This invention relates to a method of and system for enhanced inventory management, more particularly, to a system that creates detailed forecasts of sales before generating profit maximizing sets of requisitions and/or manufacturing work-orders that maintain finished goods inventory at the levels required to maintain user-specified service standards, while satisfying the financial constraints forecast by the system and user specified constraints, during the next 1 to 78 time periods.
The effective control of inventory is one of the more difficult problems faced by businesses today. The high cost of capital and storage space combined with the high risk of obsolescence, created by the ever accelerating pace of change in today's economy, drives companies to minimize their investment in inventory. At the same time, unprecedented growth in the number and variety of products, intense global competition and increasing demands for immediate delivery can force companies to increase their inventory investments. Balancing these two conflicting demands while effectively and efficiently considering the different price schedules, volume discounts, quality and lead time options that different vendors and different in-house manufacturing resources offer is a very complex task. The complexity of this task has increased geometrically in recent years.
One of the major causes of this increase in complexity is the unprecedented increase in the number and variety of products in almost every product market from "apparel and toys to power tools and computers.".sup.1 For example, "the number of new product introductions in the U.S. food industry has exploded in recent years from 2,000 in 1980 to 18,000 in 1991.".sup.2 Because the level of total sales to customers has not increased at a level that even remotely approaches the rate at which the number of products has increased, virtually every commercial enterprise selling products, most notably manufacturers, distributors and retailers, has experienced a significant increase in the number of inventory items that must be managed. Complicating matters even further, the increase in the rate of new product introductions has been matched by a corresponding increase in the rate at which old products are discontinued or replaced by new products. This increasing risk of product obsolescence has increased the financial risk associated with inventory management as discontinued products generally have drastically lower market values. Businesses that are left holding products that have been discontinued or replaced are generally forced to take severe markdowns and/or make inventory write-offs that can seriously diminish or even eliminate their working capital. FNT 1. Marshall Fisher, Janice Hammond, Walter Obermeyer, Ananth Raman, "Making Supply Meet Demand in an Uncertain World", Harvard Business Review, May-June 1994, page 83. FNT 2. ibid, page 86.
The difficulties described above are being exacerbated by the increase in complexity caused by vendors that have introduced a variety of new discount schedules and incentives. Traditional purchasing incentives were associated with offering lower prices for larger purchases of a single item. These item-quantity discounts are still widely used by vendors in a variety of industries. New discount options have been created in an effort to enhance the frequency of repeat business by rewarding customers with discounts based on their total level of business during some time period, usually a year, rather than basing discounts solely on the basis of the quantities from a single order as they had done in the past. These business-volume discounts typically offer two different types of discount schedules to the customer. The first being a discount schedule based on the dollar volume purchased during a specified time period. This type of discount schedule is commonly known as an as-ordered discount schedule. Under this type of discount schedule the level of discount rises as the total as-ordered volume increases. An example of this type of discount schedule is shown in Table 1.
TABLE 1 ______________________________________ As-Ordered Discount Schedule Vendor A Vendor B ______________________________________ $0-$20,000 0 0 $20,001-$50,000 0 5% over $50,000 2% 6% ______________________________________
The second type of business-volume discount schedule is typically based on the customer's commitment to purchase a specified volume of a product during a specified time period. The commitment-basis discount schedules typically come in two segments. First, the customer is given a different base price schedule for items purchased when a commitment to buy a certain quantity of the item has been made. The base prices on the commitment-basis price schedule often contain discounts from the as-ordered base prices as shown in Table 2.
TABLE 2 ______________________________________ As-Ordered Vendor-Product Commitment Base Price Base Price ______________________________________ Vendor A - Widget $20.00 $21.00 Vendor A - Carton $5.00 $5.00 Vendor B - Widget $20.50 $22.00 Vendor B - Carton $4.50 $5.00 ______________________________________
Once the customer has purchased a certain amount on a commitment basis, all subsequent orders for that item during the relevant time period will be priced at the commitment price and the customer is said to have "locked in" the commitment price. The second element of the commitment-basis discount is typically a percentage discount based on the cumulative total of commitment purchases made during the relevant time period. An example of this type of commitment-basis discount schedule is shown in Table 3.
TABLE 3 ______________________________________ Commitment Discount Schedule Vendor A Vendor B ______________________________________ $0-$10,000 0 0 $10,001-$25,000 1% 2% $25,001-$50,000 2% 4% $50,001-$100,000 3% 6% over $100,000 5% 8% ______________________________________
In this environment a customer would have four different possible prices for the purchase of five hundred (500) widgets from the two different business volume discount vendors as shown in Table 4.
TABLE 4 ______________________________________ Vendor A Vendor B ______________________________________ Year to date actual as-ordered $7,012 $19.553 volume - total Current as-ordered discount percentage 0% 0% Widget commitment price locked in? YES NO Widget base price as-ordered $20.00 $22.00 Cost for 500 widgets - as-ordered $10,000 $10,472 Year to date actual committed $28,119 $67,328 purchases - total Current commitment-basis 2% 6% discount percentage Widget commitment-basis price $20.00 $20.50 Cost for 500 widgets - commit- $9,800 $9,635 ment-basis ______________________________________
It is clear from the preceding example that the business volume discount schedules can severely complicate a purchase order decision. In the example shown above the lowest cost alternative for the company is to order from Vendor B on a commitment basis. Thus we see that a customer would have to evaluate the quantity commitments to two vendors, closely monitor the year to date volume for each vendor and evaluate up to four different prices from the two different vendors before placing a single order for a single item. It is also clear from the preceding example that the task of consistently determining the best purchase options for even a small commercial enterprise stocking only a few hundred items can be a daunting task. It is important to note here that the level of complexity shown in this example has been simplified as it ignores the complications that would be introduced by considering different units of measure from the different vendors.
Because of the complexity and risk associated with the inventory management task, it is not uncommon for companies to have several personnel in an operations or purchasing department dedicated to planning, purchasing and controlling inventory investments. In performing their various job functions the operations/purchasing personnel in larger companies typically utilize several different computer based systems for: forecasting demand, planning purchase orders or manufacturing work orders, monitoring the quality and quantity of the items received in the warehouse, tracking returned goods, placing purchase orders, controlling inventory, monitoring costs and entering sales orders. In smaller companies the management of inventory is often accomplished through the use of informal and paper based systems. In some cases the informal systems and the larger "formal" systems are supplemented by microcomputer based spreadsheet programs. In all cases, the goal of the operations/purchasing department is to have the required items in inventory available for sale when the customer orders the product while keeping the investment in inventory as low as possible.
Because inventory is typically the largest component of working capital for companies in the retail, manufacturing and distribution industries, the importance of efficiently managing inventory can not be overemphasized. The significance of effective inventory management practices is particularly high for the small companies that comprise the fastest growing segment of the modem American economy. These small firms typically don't have the working capital required to withstand large mistakes in inventory management. Compelling evidence of the importance of effective inventory management practices is found in the Dun & Bradstreet Business Failure Record that shows inventory investment problems are one of the leading causes of business failure for retail, manufacturing and distribution companies. It is clear from the preceding discussion that a system that helps companies effectively manage inventory could enhance both the short-term financial results and the long-term survival prospects of many companies.